Wednesday, January 26

How Evergrande’s founder from poverty to riches is trying to save his empire

Four years after competing with Jack Ma for the title of the richest man in Asia, Evergrande President Hui Ka Yan’s fortune is sinking and his sprawling real estate empire is on the brink of collapse.

It’s a surprising change for a man who struggled out of poverty in rural China to build one of the largest real estate companies in the world. In earlier times of trouble, Hui had been able to enlist the help of his tycoon friends and the support of the local government. This time, with $ 305 billion in liabilities and the company’s asset prices falling, Hui seems lonelier than ever.

“There is no interest in rescuing him,” said Desmond Shum, whose book on his dealings with China’s political elites, “Red Roulette,” describes how he once went shopping with Hui for a superyacht. “In the situation he is in now, I don’t think any political connection is going to rescue him.”

What happens to Hui is questionable, even if he will retain ownership of his empire. One of his allies and billionaire colleague, Zhang Jindong, lost control of the retail arm of his conglomerate Suning when he received a state-backed bailout in July, in part because he helped Hui through a difficult situation. Other heads of failed companies have faced worse fates, from arrest to execution.

Hui’s empire is becoming one of the biggest victims of President Xi Jinping’s efforts to curb the excesses of debt-fueled conglomerates and defuse risks in the country’s housing market. Evergrande and its affiliated companies were built through an aggressive combination of dollar debt issuance, equity sales, bank loans, and shadow financing – avenues of financing that have been virtually cut off. The group now faces at least one debt restructuring, which could be the largest in China.

Even your long-term backers may be losing patience. Chinese Estates Holdings Ltd., controlled by the family of real estate mogul and poker partner Joseph Lau, has been selling Evergrande stock and said it could divest its entire stake.

Hui remains in charge of the group and was seen publicly at the Communist Party’s centennial celebration in Tiananmen Square in July, illustrating the power of his political connections. He met with employees last month and signed a public statement emphasizing the importance of completing construction on the sold properties.

Evergrande did not immediately respond to questions seeking comment.

However, the lack of public support for Beijing’s Hui and his collapsed fortune ($ 15 billion this year) are forcing him to step up efforts to save his empire, such as selling stakes in some of Evergrande’s prized assets. This includes allegedly selling a majority stake in its real estate services unit to another developer controlled by the billionaire Chu family.

Hui has survived many challenges in the past. He was born in Henan Province in 1958. After losing his mother as a baby, he was raised by his grandmother and father, who cut wood for a living. Education provided an escape from poverty. Hui graduated from the Wuhan Institute of Science and Technology in 1982, just as Deng Xiaoping was opening up the economy. After working for a steel company, he quit his job in 1992 to try his luck in real estate.

Expanding empire

He founded Evergrande in 1996 in the southern city of Guangzhou, and over the next several decades he turned the company into a colossus that controlled land five times the size of Manhattan. Hui didn’t stop at the property, accruing interest in soccer and volleyball teams, bottled water, online entertainment, banking and insurance. He promised to outshine Elon Musk with the “world’s most powerful new energy car company.”

As the company grew, so did Hui’s wealth. His personal fortune rose to $ 42 billion at its peak in 2017. His majority stake in Evergrande meant he profited handsomely from dividends, pocketing $ 8 billion since 2011 alone, according to Bloomberg calculations.

His companies bought luxury mansions, including one in Sydney that had to be sold in 2015 after the Australian government found the purchase violated foreign investment rules. He was the sole director of a company that owned a $ 100 million home in the hills above Hong Kong Island, before he recently resigned, according to company registration filings.

Hui made sure to align his business with areas that dovetailed with the priorities of China’s Communist Party leaders, particularly Xi, from making the country a global technology leader to winning the World Cup. He is a member of the Political Advisory Committee, which helps advise the government on policy. In 2018, he was included in an official list of 100 outstanding entrepreneurs.

Hui touted the millions of jobs the company created and the billions of yuan paid as taxes. He also emerged as a philanthropist, topping Forbes’ China list for charitable giving.

“Everything in Evergrande is of the party, the country and society,” Hui said in a speech the same year. “For this reason, we must assume social responsibility.”

New era

However, there was growing concern about the size of the company’s debts, which by 2018 had risen to more than $ 100 billion. That year, China’s central bank singled out Evergrande for having the potential to pose systemic risks to the financial system, along with HNA Group, Tomorrow Holding Co. and Fosun International Ltd. The Chinese era of conglomerates expanding through acquisitions. aggressive debt-driven was ending.

Hui, pledging to reduce his reliance on leverage, turned, as he had often done in the past, to friends and corporate contacts to raise money.

His companies made about $ 3.6 billion in transactions since 2018 with real estate empires run by three other Chinese moguls, members of the so-called Big Two Club because of their fondness for a poker game of the same name. They include Lau from Chinese Estates. Its investments include buying stakes in Hui’s electric car and real estate services units, as well as an online sales platform.

But the regulators kept tightening the screws. Shadow loans, non-bank financing that accounted for nearly a third of Evergrande’s debt in 2019, opaque borrowing through joint ventures was analyzed and regulators avoided new loans with their “three red lines” policy to limit leverage.

Such measures helped trigger a liquidity crisis for Hui in 2020. A failed backdoor listing for Evergrande’s continental unit left her on the hook for up to $ 20 billion in repayments to investors. A leaked letter from Evergrande to the Guangdong provincial government (documents the company said were fabricated) warned that the company faced a potential default that could affect the financial system. Soon after, an agreement was reached to avoid most of the refunds, backed by local officials. Hui took a step back from the edge, but it wasn’t for long.

Disputes with suppliers over unpaid invoices began to make headlines. Some sought to freeze assets, others paralyzed projects. Local support waned, publicly at least, as Xi stepped up his crackdown on the real estate sector and pushed ahead with his campaign to create “common prosperity.” Behind the scenes, officials urged Hui to resolve his company’s debt problems as soon as possible.

Despite Evergrande’s size, there is little sign that Beijing will act to help.

Hu Xijin, editor-in-chief of the state tabloid Global Times, said in a Weibo post last month that companies like Evergrande cannot be “too big to fail” once they explode. “They must have the ability to save themselves through the market,” he said.

A large bailout would send the wrong message when Xi is trying to control billionaires and close the nation’s wealth gap, said Donald Low, director of the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology.

“Bailing out Evergrande creates moral hazard, increases the likelihood of more debt binges like Evergrande’s, and, perhaps most importantly, undermines the president’s efforts to promote common prosperity, as a bailout would be viewed, rightly, as a massive subsidy for the rich, “Low said. .

Instead, Hui has been ramping up asset sales to find the cash to repay the company’s many creditors, from retail investors demanding payment of some 40 billion yuan in Evergrande high-yield investment products, down to 1, 6 million home buyers who deposit in apartments that have yet to be built, as well as bondholders. The company is the largest junk bond issuer in Asia. International rating firms have repeatedly downgraded the company’s debt as concerns have grown that the firm will not default.

Evergrande agreed last month to sell part of its stake in a continental bank to the local government in a deal that, according to S&P Global Ratings, marked the first step toward solving the company’s liquidity crisis. Evergrande also negotiated the sale of a 51% stake in its real estate services unit to Hopson Development Holdings Ltd., Cailian reported on October 4.

“If they can sell this unit successfully, it will help them pay off short-term debts, but it will also limit the future growth of the company,” said Kenny Ng, strategist at Everbright Sun Hung Kai Co.

The pressure is building. Evergrande has given no indication that it has paid off two recent dollar bond coupons, even though financial regulators encouraged the company to take all possible steps to avoid a short-term default on the dollar bonds. You have defaulted on the interest payments of at least two of your largest bank creditors. The company’s shares, which are currently suspended, are down 80% this year, while its dollar bonds are at record lows.

As Hui seems increasingly isolated, time will tell if the billionaire can find his way out of his current challenge. Even if he does, his empire will likely look very different as Xi pursues his ambitious plans to reshape China’s economy.

A shrinking workforce means that “China must rely exclusively on productivity for economic growth,” said Alejandra Grindal, chief economist at Ned Davis Research. “An unproductive and over-leveraged real estate company, like Evergrande, is not conducive to a productive prospect.”

© 2021 Bloomberg

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